Are you one of the millions of investors holding larger than normal amounts of cash for safety?
With the 10-year Treasury rate spending most of their time below 3% over the last four years (and less than 2% from April 2012 to May 2013) keeping the bulk of your savings in cash may be not the safe harbor you think it is.
It may be surprising to some, but if your primary goal is to preserve your wealth, investing and maintaining exposure to the markets may be a better option than keeping your money in cash in the long term.
From 2004-2013, cash had the second-worst performance out of the 10 major asset classes, according to JPMorgan. Only highly volatile commodities performed worse. Even emerging markets, with their volatility and their collapse in 2008, outperformed cash over the 10 years cumulatively by 180.7%.
I believe cash’s sub-par return performance, relative to other investment options, will continue. According to Bloomberg, from 2004 through 2008, the good years, you would have been paid an average of 3.963% for holding a 1-year CD. Today, if you buy a 1-year CD it pays a mere 0.518%. The threshold for assets other than cash to outperform is very low.
That’s not including the other risk to holding cash: inflation. While inflation isn’t the concern yet, we expect prices to continue to rise, especially with the Fed making noises about changing it’s view on rates. In either case, what you have in the bank today will buy you less tomorrow.
The Value of Diversification
Given the poor historical performance and outlook for cash, it’s surprising that about one-fifth of all high net worth individuals (with $3 million or more in investable assets) are holding more than 25% of their portfolio in cash, according to a recent US Trust study.
I often ask clients and prospects why they hold so much cash. The answer, almost inevitably, is tied to uncertainty about the markets, especially with stocks at or near all-time highs.